Sad State of Affairs

Researchers at The University of Minnesota raise the ire of the soybean industry by claiming that growing biofuel crops may lead to unintended global warming as well as replacing valuable food production. The 'beaners threaten that they will pull soybean research funding from the university. The truth hurts.

One of the few Peak Oil advocates in Congress (and like Roscoe Bartlett, a Republican no less) Wayne Gilchrist loses his primary contest to a real right-winger (danger: a Rush Limbaugh link). Maryland's loss of someone with some brain cells gets balanced by the good possibility of a Democratic seat pickup. Gilchrist tried to appease the Rethugs, but that doesn't work against bullies if you don't completely toe the party line. Fortunately, losing a thoughtful Republican only serves to marginalize a completely irrelevant political cult.

Conspiracy Theory #23

Too fascinating to pass up:
Peak Oil, Missing Oil Meters and an Inactive Pipeline:
The Real Reason for the Invasion of Iraq?
From TOD ... almost like you don't even need to read the article.

Using Real Options Analysis For PSC Contract Term Negotiation

(This article is summarized from paper that had been presented in 32nd IPA Annual Convention on May 27th, 2008, Jakarta Convention Centre, Merak Room 3, at 13.00-13.30)


Today, we have a challenge to increase oil and gas production in Indonesia as Government has set the target of 1.034 MBOPD for oil and 1,169 MBOEPD for gas in 2008. There are some efforts to meet this target i.e. optimizing the existing production field using intensively advance technology such as EOR, accelerating new development field, and encouraging exploration activity to discover new reserve.

To support the exploration activity in the unexplored area in Indonesia,, since 2002 government actively opens tender of new PSC blocks. As shown in the below figure, only below 50% of total blocks offered that had been signed in the following year. The interesting data is what occurred in 2006 when oil price was relatively high around $65/bbl, only 5 contracts was signed in 2006. It seems that the level of uncertainty was growing in 2006 due to uncertainties of cold weather in parts of Asia, Europe and US h and oil supplies from Nigeria, Iran and Iraq. This condition resulted many investors at that time waited until uncertainty resolved before undertaking the necessary investment. As uncertainty reduced specially for the level of oil price, in 2007, investors started investing in Indonesia as reflected by 26 PSC contract signed in 2007. It seemed that in 2007 investors looked at the oil market had the new level of price equilibrium because supply and demand for crude in market had been stretched for several years.

Figure 1. Blocks Offered, Signed and Signature Bonus for 2000 – 2007 period
(Source : Ditjend Migas)

These above fact open our insights that besides the cost that investor invest as well as the pay out rate that investor wants to get, there is another factor i.e. uncertainty that should be considered in making decision on the project. In other words, there is a “threshold price” that investor will invest optimally. As uncertainty increases, threshold price will increase. If a project value does not exceed the threshold price, investors prefer to wait before they decide to invest.

Determining the threshold price of the project can be a good starting point for negotiation between government and contractor to accelerate the development of the PSC projects and also for PSC contract extensions. In part of the bidding process, government can also use this approach to set an attractive PSC contract term for investor.

USING REAL OPTIONS TO FIND THE THRESHOLD PRICE OF UNEXPLORED RESERVE PROJECT

Currently, the economics criteria for negotiation are still based on the DCF result. However, this methodology is failed to find the threshold price that the project can be invested immediately considering the effect of uncertainty surrounding the value of investment.
Real Options is an alternative methodology that can find this threshold price that considered factor of development cost, pay our rate and also the uncertainty level.

Following Paddock, Siegel and Smith (1988) real option approach, we extend their approach to value unexplored reserves in Indonesia and propose the adaptation of the above parameters into Indonesian PSC regime.

Two parameters that we can adapt into PSC regime are as follows:

1. PV of Development Cost

PV of Development cost is taken from after tax deduction of intangible drilling cost since this cost can be expensed for tax purposes. In PSC regime, the factor of contractor share should also be considered because cost occurred in PSC basically will affect contractors as much as their split shares.

DevCost afer tax = DevCost-(% Intangible Expense*DevCost*Contractor share*Tax)

2. Pay Out Rate

Following Paddock, Siegel and Smith (1988), we start by calculating the waiting opportunity cost δ, defined as follows:

γt: fraction of oil produced yearly ,
πt: net profit per barrel,
Wt: unit value of developed reserve (per barrel)

In the Indonesian PSC regime, the term of net profit (πt) of contractor is defined as contractor share split after tax. Any changes in oil price (Mt) will affect contractors as much as their “split share after tax”. The same application is also used for developed reserve value (Wt) where contractors just accrue as much as their “split share after tax”. Based on these adjustments, we define pay out rate, δ in PSC regime as follows:



HYPOTETHICAL UNEXPLORED RESERVE VALUATION

To illustrate the valuation for unexplored reserve, we will use the case of the exploration block in PSC regime. Block Y had been awarded to Medco on October 2003 with contractor share after tax of 25%.
For comparison study, we use Block Z as the hypothetical sample that had the same contract term as Block Y.

Table 1.
Data Assumption for Block Y and Z

As shown in the above table, we see that block Y has more valuable than block Z since the chance of success and estimate reserve of Block Y if success is higher than block Z. The other thing, the development cost of block Y is lower than block Z.
In the end of 2003, the market oil price was at $25.00/bbl flat. Following Gruy and Wood (1982) that assumed that the developed reserve is one third of market crude price, we can estimate the pay out rate for each field. The results can be seen in the below table.

Table 2
Pay Out Rate for Block Y and Z

Let’s assumed the volatility and risk free interest rate are at 34% and 5% respectively, the value of development option if these reserves are success to be discovered as shown in the below table.

Table 3
Value of Development Option for Block Y and Z

From this table, it was confirmed that Block Y has a potential to be developed soon since project value is higher than threshold price. In contrary, Block Z has a higher threshold price than project value. Look at this situation; it was possible for government to give investment credit as an incentive for Block Y since the development cost is relatively high. Normally, investment credit is applied for facilities development.

Table 4
Optimal Investment Credit (IC) for Block Z



The break point of the project value exceeds threshold price if government give investment credit more than 60.1% as shown in the above table.

Table 5
Maximum Exploration Spending

The signature bonus paid for block Y was`$2.6 million and for block Z we assume we pay only $1 million. As shown in above table, the maximum exploration cost that can be spent in block Y is $38.36 MM. For Block Z, the maximum exploration cost is going up from $2.97 MM to 3.98 MM after government gives an investment credit. From this case, there is a signal that by giving an incentive to lower the threshold price, we can increase the opportunity to find the reserve with more exploration spending.

CONCLUSIONS

We have extended the idea of pricing unexplored reserves as options to the evaluation in the Indonesian PSC Regime. From the hypothetical study, it shows that real options method is a potential tool to form a proper basis for the negotiation of contract terms between the contractor and Government, as a result of which development of the undeveloped reserves in Indonesia can be stimulated.

COURSE : Petroleum Project Valuation

PETROLEUM PROJECT EVALUATION : TECHNIQUES AND APPLICATION
(From Conventional to Modern Methods)

A four day, hands on, Excel-based Course, with Harvard Business Case Study

TUJUAN TRAINING

Kursus ini akan :

• mempelajari dasar-dasar teknik bagaimana kita melakukan penilaian proyek perminyakan serta bagaimana implementasinya dalam kontrak PSC Indonesia
• membantu peserta dalam mengidentifikasi dan menghitung faktor risiko dengan menggunakan sensitivity analysis dan Monte Carlo Simulation
• mempelajari bagaimana memperkirakan value of information dan value of flexibility dalam mengelola uncertainty pada proyek perminyakan.
• mengajak peserta untuk melihat perkembangan terbaru mengenai teknik penilaian proyek perminyakan dengan menggunakan metode Real Options.

TARGET PESERTA

Kursus ini sangat cocok sebagai pengenalan untuk Engineers, Geologist, Economist, Finance, Asset and Project Manager yang ingin mempelajari teknik penilaian proyek dari metode yang konvensional sampai yang modern dalam industri perminyakan.

MANFAAT TRAINING

Pada akhir training, peserta akan :

• melihat bahwa metode traditional NPV tidak cukup untuk mengukur nilai keseluruhan suatu proyek perminyakan.
• Menemukan bahwa nilai suatu proyek harus memasukkan nilai fleksibilitas manajemen dalam meyesuaikan tindakan mereka di masa yang akan datang dalam mengambil keuntungan dari nilai potensi upside suatu proyek dan meminimalkan risiko dari proyek tersebut.
• Mendapatkan keahlian dalam mengidentifikasi, membuat model serta melakukan penilaian proyek perminyakan di Indonesia, dengan menggunakan berbagai teknik penilaian yang ada (dari metode konvensional sampai modern)

SEKILAS MENGENAI ISI TRAINING

Sesuai dengan skema diatas, kita akan membahas satu persatu topik bahasan sebagai berikut :

1. Hari pertama (Selasa, 16 Desember 2008)

08.00 Registerasi
08.15 Pengenalan Peserta dan Course Outline
08.30 Kontrak PSC Indonesia

• Sejarah PSC Indonesia
• Definisi dan istilah-istilah yang ada dalam PSC
• Perbedaan akuntansi PSC dengan Akuntansi Standar berdasarkan PSAK

10.00 Coffee Break

10.15 Practical Exercise

• Perhitungan PSC sederhana
• Perhitungan PSC dalam multi year period

12.00 Makan Siang

13.00 Project Valuation dalam Industri Migas

• Peranan Project Valuation dalam membantu keputusan manajemen
• Faktor-Faktor yang penting dipertimbangkan dalam Project Valuation
• Project Uncertainty (Sumber atau tipe dan Karakteristik)
• Project Structure (Arus Kas, Fleksibilitas Manajemen, Pembiayaan)
• Value Numerics (konsep dan metode)

14.00 Discounted Cash Flow

• Konsep DCF
• Setting Discount Rate
• Discounting Procedure (Discrete vs Continuous)

14.45 Coffee Break

15.00 Practical Exercise

• Net Present Value (NPV) DCF
• Internal Rate of Return (IRR) DCF
• Studi kasus pada suatu blok PSC

16.00 Selesai Hari Pertama

2. Hari Kedua (Rabu, 17 Desember 2008)

08.00 Analisa Sensitivitas

• Diagram Spider dan Tornado
• Practical Exercise

09.00 Monte Carlo (MC) Simulation

• Langkah-langkah dalam simulasi MC
• Probability Distribution
• Interpretasi hasil output dari Simulasi MC

10.00 Coffee Break

10.15 Decision Tree Analysis (DTA)

• Konsep Decision Tree (DTA)
• DTA dalam exploration economics
• Probability of geological success
• Expected Monetary Value (EMV)

12.00 Makan Siang

13.00 Practical Exercise DTA

• Value of Information
• Value of Flexibility

14.45 Coffee Break

15.00 Case Study
Harvard Business School Case Study : “Texaco vs Penzoil Case ”

16.00 Selesai Hari Kedua

3. Hari Ketiga (Kamis, 18 Desember 2008)

08.00 Real Options

• Teori Real Options
• Lahirnya Real options
• Real Options dalam industri Migas
• Intuisi dibalik Real Options
• Real Options Mind set

09.30 Financial Options Analogy

• Konsep Financial Options Analogy
• Penggunaan Black Scholes Merton (BSM)

10.00 Coffee Break

10.15 Case Study - BSM
Harvard Business School Case Study: “MW Petroleum ”

12.00 Makan Siang

13.00 Financial Options Analogy - continued
Model Paddock, Siegel dan Smiths (PSS)

14.00 Practical Exercise
Penilaian undeveloped reserve dengan PSS Model

14.45 Coffee Break

15.00 Practical Exercise - Continued
Penilaian unexplored reserve dengan PSS Model

16.00 Selesai Hari Ketiga

4. Hari Keempat (Jumat, 19 Desember 2008)

08.00 Binomial Lattice

• Konsep Binomial Lattice
• Simple Lattice Steps
• Penilaian Development Field
• Penilaian Exploration Field

09.00 Applikasi Binomial Lattice dalam regime PSC

• Adaptasi parameter in PSC
• Practical exercise in PSC block

09.30 Coffee Break

09.45 Perhitungan Binomial Lattice dengan software Real Options Super Lattice Solver (ROSLS)

11.15 Makan Siang dan Shalat Jumat

13.00 Real Options Statis

• Perbedaan antara DCF vs Real Options
• High vs Low cost Field

14.00 Practical Exercise
Perhitungan NPV dari PSC blok dengan pendekatan DCF dan RO statis

14.45 Coffee Break

15.00 Issue dan Tantangan Organisasi

15.30 Wrap – Up dan Kesimpulan

16.00 Selesai Hari terakhir

KEBUTUHAN KOMPUTER

Training ini banyak melakukan latihan dalam spreadsheet Excel, jika peserta memiliki laptop, sebaiknya dibawa dalam training ini.

BAHAN TRAINING

1. Satu set hard copy dari presentasi yang mencakup konsep valuation, perhitungan numeric, dan contoh aplikasinya.
2. Model spreadsheet excel untuk menilai proyek perminyakan dalam kontrak PSC.
3. Super Lattice Solver software (Trial Version) untuk perhitungan binomial lattice

PENDAFTARAN

Untuk informasi pendaftaran silakan hubungi :

XP training
Gedung Raudha Jl. Terusan Kuningan No. 21 Mampang Lantai 1 Blok A4 Jakarta 12710 Ph. 021-527 9915 Fax. 021-5279915. E-mail: xp.training@cbn.net.id CP : Anton (0817207429), Naila Zahara (081321754000)

Crude Oil Production Plateauing?

The latest data collected by Rembrandt on TOD shows indications of crude oil production plateauing.

In the comments, JonFreise referenced a potentially pertinent article to the Dispersive Discovery Model:

http://dieoff.org/page197.htm

Net Energy Analysis of the U.S. Oil and Gas Exploration Industry

"Why should yield per effort be related to effort? This makes sense for fish, for the fish can recover through reproduction and growth when not fished. Petroleum obviously cannot, at least on time scales of interest to our species. One possible explanation is that when drilling rates are low, the petroleum industry drills at locations where present information suggests that success is most likely. During years of high drilling rates, drilling is done there plus at other, less promising locations. Presumably the development of exploration theory, as well as seismic charting and interpretation, occurs at a more constant rate than drilling effort, so that when drilling effort (i.e., economic incentive) is low, it is concentrated in areas where success appears more likely. When drilling effort (and economic incentive) is high, much of that effort is directed at targets less likely to produce a large find. In a sense it is promising but untested geologic information that is depleted as wells are drilled and that accumulates in the absence of drilling."

I don't disagree with this as it basically says that a wide range of search rates get deployed over the years, and much of the high/fast effort gets expended near the margins of potential oil volume. The Dispersive Discovery model essentially takes a probabilistic range in search rates over a large potential volume of finds to come up with the more-or-less "bell-shaped" discovery curve.

Not Cleavon Little

Wing Nut Oil

Abiotic oil exists as a mixture of substances. It contains equal parts of wingnut extraction -- one part of pinheaded writing, one part of fundie media, and the rest right-wing radio frothing. Jerome Corsi wrote the article, sure to become part of a book that will lose money. World Nut Daily publishes this crap because it fits their 'minionist world view. And a spewer by the name of Jim Quinn of the Quinn & Rose radio show broadcasts the news to a population of shut-ins because he clearly has nothing better to do (he admits that he gets no money from his satellite radio show).

Fossil fuels clearly come from a biological origin. The identification of unique markers in the deposits scientifically prove that only biological processes can generate the oil. Whatever methane exists can obviously come from a physical inorganic origin because the molecular structure has a simple basis. Thugs like Jim Quinn love this "controversy" because it allows them to mention Peak Oil, and call it a phony theory. Without abiotic oil "proof", they won't talk oil depletion because they immediately lose the debate.